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Operator
All participants please stand by. Your conference is ready to begin. Good morning ladies and gentlemen. Welcome to the Western Forest Products Third Quarter 2021 Result Conference Call. During this conference call, Western's representatives may make forward-looking statements within the meaning of applicable securities law. These statements can be identified by words like anticipate, plan, estimate, will, and other references to future periods. Although these forward-looking statements reflect management's reasonable beliefs, expectations, and assumptions, they are subject to inherent uncertainties and actual results may differ materially. There are many factors that could cause actual outcomes to be different, including those factors described under risks and uncertainties in the company's manual M, D, and A, which can be accessed on SIDAR and is supplemented by the company's quarterly M, D, and A. Forward-looking statements are based only on information currently available to Western and speak only as of the date on which they are made. Except as required by law, Western takes no obligation to update forward-looking statements. Accordingly, listeners should exercise caution in relying upon forward-looking statements. I would now like to turn the meeting over to Mr. Don Demons, President and CEO of Western Forest Products. Mr. Demons, please go ahead.
Demons
Well, thank you, Kate, and good morning, everyone. I'd like to welcome you to Western Forest Products 2021 Third Quarter Conference Call. Joining me on the call today is Stephen Williams, our Executive Vice President and Chief Financial Officer, and Glenn Nuntel, our VP of Corporate Development. We issued our 2021 Third Quarter results yesterday. I intend to provide you with some introductory comments and then ask Steve to take you through a summary of our financial results. I'll follow Steve's review with our outlook section before we open the call to your questions. Before I begin, I'd like to recognize our team at Western for their continued strict adherence to our robust COVID safety protocols. Their dedication to safety has delivered another quarter with no COVID workplace transmissions or downtime. This result is a testament to our strong safety culture and the commitment of our people. Financially, I'm pleased to report that our results were a third quarter record for the company. Our specialty products focus and ability to pivot production from volatile North American commodity markets to more stable export markets allowed us to generate record third quarter adjusted EBITDA of $66.3 million. This result is almost double the EBITDA we delivered in the third quarter of last year. Our strong operating results have allowed us to reposition our balance sheet and continue with our balanced approach to capital allocation. Year to date, we've returned over $80 million to our shareholders through dividends and share repurchases. And we ended the third quarter with $143 million of cash in our hands, more than $140 million Canadian dollars on deposit with the U.S. Treasury. In conjunction with these excellent results, we've also continued to demonstrate our leadership in advancing our ESG commitments. During the third quarter, we achieved a series of milestone agreements focused on joint and collaborative planning of forestry activities with Indigenous nations in whose traditional territories we operate. These partnerships build upon Western's well-established sustainable forestry practices by incorporating Indigenous values within planning and forestry activities. We're committed to fostering positive working relationships with Indigenous nations in support of reconciliation and know that by doing so, we will also create more certainty for our business. During the quarter, we also became the first North American publicly traded forest company to transition to a sustainability-linked credit facility, linking the interest rate we pay to the achievement of certain sustainability goals. And finally, we announced a new eight-year labor agreement with the hourly employees of our value-added division. I'm proud of what our team at Western has been able to accomplish, and I look forward to continued success and growth together as we move forward. I'll now turn it over to Steve to review our key financial results.
Steve
Thanks, Don. My comments will focus primarily on our financial results for the third quarter of 2021 with comparisons to the third quarter of last year. We reported third quarter adjusted EBITDA of $66.3 million as compared to $33.7 million in the same quarter last year. Results in the quarter benefited from higher lumber and log prices, an increase in lumber shipments, higher by-product revenue from improved chip price realizations, and lower export tax expense. Results were partially offset by lower log shipments, higher stumpage expense, and higher performance-based compensation expense related to our strong financial results and the appreciation of our share price. Lumber revenue increased 44% compared to the third quarter of 2020 on increasing shipment volumes and higher prices for our products. Our third quarter average realized lumber price was $1,553 per thousand board feet, an increase of 23% compared to the same period last year. Log revenue was lower in the third quarter of 2021 compared to the same quarter last year as a prolonged fire season led to Timberland's operating retailments which limited log harvest and sales volumes. We directed export-grade log supply to our saw mills to support lumber production. By-product revenue increased by $3.8 million as compared to the same quarter last year, benefiting from improved chip price realizations due to a higher NBSK pulp price. Freight expense was flat as compared to the same quarter last year. Increased lumber shipment volumes and higher freight rates were offset by a reduction in export log shipments. Third quarter results included $6.2 million of export duty expense as compared to $11 million in the same quarter last year. Lower duty rates more than offset the increase in US deaths in lumber shipments and higher lumber prices. At the end of the quarter we had approximately $116 million US dollars of duties on deposit. Lumber production decreased 9% compared to the same quarter last year due to log supply related operating retailments. Log production in the third quarter of 2021 was 39% lower than the same quarter last year. Harvest activity was impacted by prolonged operating retailments as fire conditions persisted for longer than usual in the summer. We ended the quarter with approximately 753,000 cubic meters of log inventory which is lower than historical levels for the end of the third quarter. Our BC coastal per unit harvest costs increased by 17% from the same period last year driven by higher stumpage costs and lower harvest volume. From a profit and loss perspective, third quarter net income was $42.2 million as compared to $11.5 million in the same quarter last year. Looking at third quarter cash flow and capital management. Cash provided by operating activities after changes in non-cash working capital was $82.5 million in the third quarter as compared to $40.4 million in the same quarter last year. Cash used in investing activities was $1.1 million in the third quarter as compared to $4.6 million in the same quarter last year. Capital expenditures in the third quarter of 2021 were offset by proceeds from asset sales of $5.5 million. We returned $33.8 million to shareholders during the quarter via dividends and share repurchases. Year to date, we have returned over $80 million to shareholders. We ended the quarter with $143 million in net cash and $384 million in available liquidity. Don, that concludes my comments.
Demons
Well, thanks, Steve. I'd like to start off our outlook section by touching on fourth quarter seasonality. Typical fourth quarters, lumber consumption declines in North America. As construction slows at the onset of winter. In our timberlands, harvest volumes decline as we lose daylight operating hours. In addition, winter weather can negatively impact operations and further limit production. A combination of weather-related curtailments and reduced operating hours can put upward pressure on harvest costs. As we look to our markets, despite recent North American market volatility, we expect near-term lumber pricing to remain above historic trend levels. We believe the market will be supported by strong housing market fundamentals and ongoing logistics constraints which have challenged supply. For Cedar products, I think the next quarter is going to be a bit choppy due to normal seasonal weakness and the imposition of higher duty rates at the end of the fourth quarter. As we look into next year, we expect a strong timber parent renovation segment and reduced supply to better support Cedar lumber prices and volumes. For our niche segment, we expect continued strength in our appearance grade products while our timber market has slowed. Looking forward, we anticipate the North American timber segment will improve as we head into the spring. In Japan, the combination of limited supply and strong demand driven by an improved housing sector should support pricing into the first part of 2022. We're working hard at increasing shipment volumes to support our customers. We've expanded our shipping options by contracting break bulk shipping capacity as we manage export logistics challenges. In our log business, we expect domestic solid prices to remain strong, supported by limited supply and stable demand. In contrast, the price for our Somnorel residual chips may be challenged given the weaker MBSK market in China. All that said, the ongoing challenges related to COVID-19 and global logistics issues continue to create uncertainty in our business and could lead to pricing volatility and ongoing shipping challenges in the near term. We intend to continue to leverage our flexible operating platform to match production to market demand and logistics capacity, helping to deliver earning stability. We remain optimistic with the long term growth opportunities for wood as a sustainable building product as the world looks to reduce its carbon footprint. So now turning to some recent industry developments. Earlier this week, the BC government announced its intention to work in partnership with First Nations to potentially defer harvest in 2.6 million hectares of BC's most at risk oil growth forests. The potential deferrals are province wide. The proposed deferrals, if implemented, have been identified as temporary and are subject to First Nations engagement. The BC government continues to state that final decisions on deferral areas will be based on discussions between themselves and First Nations. We believe it's very important not to speculate. We do not have enough specific information to make a determination as to the potential impacts on our business at this time. We take government at their word that they will partner with First Nations to define deferral areas and as such no decisions have been made currently in relation to harvest deferrals. To be clear, we do not support the maps or the process the province has undertaken to produce them. But we do respect the need for First Nations to have meaningful input into decisions that may affect them. We're evaluating the maps the province has released and are pleased to have been invited by many First Nations partners to participate in joint planning processes which we hope will inform their decisions. The province has specifically stated they will set up meetings with company chief foresters to review the maps and recommendations. We await the government's call. I want to conclude by saying Western has modern sustainable forest management practices in place, including the protection of big trees and rare ecosystems. We utilize variable retention versus clear cut harvesting in many of our settings. And we expect the province and First Nations to take these leading practices into consideration when making decisions on harvest deferrals. We've also been proactively working with First Nations for many years to foster positive and mutually beneficial relationships. This has included the creation of our Sawakin Forestry Limited Partnership with the Hawaii First Nations, as well as a number of other joint and collaborative forest planning activities with other First Nations. All of these have been highlighted in our third quarter MDNA. And finally, we look forward to continue to work with First Nations and government in support of sustainable forest management in British Columbia. Turning to capital allocation, we remain committed to a balanced approach to capital allocation, returning cash to shareholders while maintaining the flexibility of support growth initiatives. Our balanced capital allocation approach includes paying a regular quarterly dividend, investing strategic and discretionary capital in our mills or through acquisitions that are accretive and real long-term shareholder value, and returning any excess capital to shareholders. We continue to make progress on the $10 million in strategic capital projects currently underway. These projects are focused on reducing costs and improving efficiency. We also continue to evaluate how we may participate in the growing use of mass timber building technologies. Overall, we plan to remain balanced and disciplined in our approach to capital allocation. Turning to what's next, our top priority remains the health and safety of our employees, contractors, and communities, and in working collaboratively with First Nations. Our strong balance sheet has given us financial flexibility to continue with our balanced approach to capital allocation while also supporting the execution of our strategic growth priorities. Our long-term focus remains the same to successfully and sustainably implement our strategic initiatives, to strengthen our foundation, grow our base, grow our business, and deliver long-term shareholder value. And with that, Kate, I can now open up the call to questions. Operator, over to you.
Operator
Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. Our first question, Paul Quinn. Your line is open. Please go ahead.
Paul Quinn
Yeah, thanks, guys. Morning.
Demons
Morning,
Paul Quinn
Paul. Morning, Paul. Maybe get some easy questions out of the way first, but you mentioned 753,000 cubic meters of log inventory lower than normal, but what kind of percent lower than normal and how do you see the flexibility moving forward in Q4?
Demons
Yeah, so great, Paul. I mean yeah, we ended the quarter with about 702,000 meters, as you have said, and that's basically driven by the impacts of the weather-related curtailments in the third quarter. I think if you look back at previous third quarters, we'd probably want to be in that 900,000 cubic meter range. What will that answer your question specifically? Will it impact production going forward? I think we're pretty good, I think, through the fourth quarter, Paul. We may have some challenges into the first quarter and that would be the mills that are typically impacted by log challenges. So I think it's manageable. It's lower than we like, but manageable.
Paul Quinn
Okay, and then it sounds like, talking about your market, that it seems pretty stable. What do you think the pricing effect is going to be on certain products with the export tax doubling at the end of the year?
Demons
Yeah, so again, good question. I think historically, what we've seen for Western is we've been focused on high-value products into the US and when the export taxes have been applied, we've been able to get a majority of that increase in cost to us in a higher price to the customer. It may be a little more difficult this time, but that is certainly our intent on the specialty products to try to capture the increase in duty rates in our pricing. We'll see how successful we are. On the commodity side, I think historically, as long as there's strong demand in the market, I think you're going to see prices go up. And that's our view. And I think you've been doing this for a long time. That's probably what you've seen as well.
Paul Quinn
Okay, and then just on the return of cash to shareholders, if you could just remind us, it's been a busy morning, so I didn't check it out, but your share repurchase authorization, where is that standing and is that something that you'd likely increase going forward?
Demons
Yeah, so I think we're at the current pace. We're in pretty good shape for the next, you know, for the foreseeable future. As long as we're able to continue to generate the type of cash we're generating, which we anticipate we will, you know, if we're in need of increasing the NCIB, we'll look to do that. You know, I go back to what is our approach on capital allocation and when we have excess capital, we intend to return it to shareholders. So I think in conclusion, near term, I think we're in pretty good shape on the NCIB right now. And we'll continue to anticipate to continue to be active in the market.
Paul Quinn
Okay, and then just lastly over to this nightmare old growth decision, just if you could, do you have any harvesting permits currently in the deferral areas that are going to affect you guys in the short term?
Demons
Yeah, so I guess when you think of that, I mean, we're going to take government for their word. You know, they're going to partner with First Nations to define deferral areas. So really right now, there's been no decisions that have been made in relation to the harvest, deferrals, and the impact on permits. I think we're really looking forward and we appreciate the opportunity to participate in these deferral discussions that many of our First Nations partners have offered us. And look, in the interim, we continue, we're going to continue to exercise the rights granted through the provincially approved gutting permits.
Paul Quinn
Okay, and then just I know it's going to take you guys a couple weeks to try to understand what these deferrals are going to, how they're going to impact your operations and your partnerships, but at a high level, we've seen some pretty crazy ideas out there that this is only affecting the BC coast. BC Coast Harvest is going to come down by 30, 40 percent. From a high level, can you, what we figure is it's probably a 13 percent reduction on harvesting both the interior and the coast. Is that consistent with what you're seeing out there?
Demons
Well, so you did a number of points. I mean, again, I would go back to my point. It's really too early to speculate and we're not in a position to speculate because we don't have enough specific information as provided by the province to make a determination on the impact in the business. You made a couple really key points though. This is province wide. And the speculation that has been out there that it's all centered in the coast, I think, is incorrect. And I worry that it will drive people to make decisions that are ill informed. So, Paul, it's going to take some time. You've seen some of the maps. They're not at a level yet that we can make a determination. And we have a number, you know, we've got over a hundred professional foresters in our company. We've got a GIS team and analytic team that are pouring over the maps, trying to ascertain what the impact is in our business. So to have anybody come out and anyone speculate that it's all on the coast or all impacting the coast and western would be dangerous and it is just speculation. So we intend to work hard at this. We intend to as quickly as we can. We're going to ask the government to clarify a number of points that we don't understand and we've already identified those. And in the end, we believe in working with First Nations and our partners to identify the best approach forward here.
Paul Quinn
All right. Thanks, guys. That's a lot. Thank you.
Operator
Thank you. Our next question, Sean Stewart. Your line is open. Please go ahead.
Sean Stewart
Thanks. Good morning, everyone. Following up on Paul's question with respect to the deferrals, Don, in your press release a couple of days ago, there was talk about pursuing potential compensation if it comes to it and it referenced investments that the company has made. And I guess what I'm wondering is is that potentially a retroactive assessment on investments you've made? Is it for prospective investments going forward? How do you think about that and if it comes to it, the process towards compensation from the government?
Demons
Yeah. So I think, again, Sean, reasonable question for sure. I think our view is it's pretty early to speculate on this and on the outcome. However, you've quoted me correctly and quoted us correctly. So, you know, first and foremost, we certainly respect the rights of the First Nations and their role in this decision making in BC. And again, I want to highlight we certainly appreciate the opportunity to participate in the deferral discussions as offered by many of our First Nations partners. We're going to work with the First Nations and government to mitigate any impact. But for sure, we're going to seek full compensation for any impacts on our business. You know, I really worry about the risk and challenges to some of the other stakeholders in this. But we're going to advocate that the province be transparent on the implications to workers, contractors, and communities. But again, reiterating what we said in our press release, we will seek full compensation if we are impacted.
Sean Stewart
Thanks for that detail, Don. And the second question I have is this is another example of policy headwinds in BC for you guys. And that's part of the motivation why you've taken a gradual approach to growth in the Pacific Northwest. Does this expedite those ambitions going forward? You've taken a really steady, slow approach to this point. Is there potential that you look to accelerate that trend as we go forward?
Demons
Sure. So, look, we remain focused on our growth strategy. We're going to continue to evaluate and explore any growth opportunities as we have been all through this piece. As we look to increase the share, especially product markets, and creating, focusing on creating long-term shareholder values. So, our main focus still remains the US Pacific Northwest just because we think it offers a better opportunity, the best opportunity for specialty product manufacturing. We are working at it every day, I can tell you, Sean. We're also working hard at developing stronger two-way relationships in Japan. And maybe working with some of our customers and potential suppliers on more specialty products that could come this way as we produce high-quality products for that market. So, rest assured, our growth strategy remains in place. We're focused on growing our specialty business and we're going to work really hard at that over the next period of time.
Sean Stewart
Okay, that's all I have for now. Thanks, Don.
Demons
Thanks, Sean.
Operator
Thank you. Once again, please press star one on your device's keypad if you have a question. Our next question, Hamir Patel. If your line is open, please go ahead.
Hamir Patel
Hi, good morning. Don, I appreciate the uncertainty in trying to predict how this old growth plays out, but just with respect to, you know, if any of the deferrals are made permanent and four years down the line, you're seeking compensation, what are the sort of recent precedent transaction values that you would point to on the coast for tenure, if we're trying to assess, you know, what the value that you might reap from that down the line might be?
Demons
Yeah, so I would just go back and say, yeah, I would reiterate pretty early on to start the speculation. I do appreciate everyone's interest in trying to figure out what maybe what compensation will look like. We're a long way from having that discussion, in my opinion. You know, our view would be we don't have enough specific information to even determine what impact there could be in our business at this time. That said, when you talk about precedent transactions, you know, we have worked really hard working with First Nations on precedent transactions. You know, our Sauerkin Forestry Limited Partnership is a pretty good proxy for valuations in that area. That is all public information. It's the only company I'm aware of that's been able to execute a limited partnership in this fashion. But I would also highlight every tenure has different valuations based on the mix of species, the access, the accessibility and cost structure. So, you know, it's early on. I reiterate, too early to speculate. We're still working through the potential impact and we're anxious and really pleased with the opportunity that our First Nations partners have offered for us to work with them on this process.
Hamir Patel
Thanks, Don. I appreciate the color. And then I was also wondering, you know, with respect to areas where you might have overlapping First Nations claims and different First Nations might have, you know, different desires about how to move forward. Any sense as to how the province will navigate those situations?
Demons
Well, in actual fact, no. You know, again, it's the provinces come out with their statement and the report from their technical advisory panel and the industry was not engaged in that discussion. And we'll have to work through what potential impacts and First Nations decisions are as we go. So I really can't comment on that.
spk06
All right. And just with respect to the final point, with respect to the CAPEX, as you
Hamir Patel
know, I appreciate the uncertainty, but just in terms of as you know, you're working through your business plan, what's you know, how is how you think about CAPEX for 2022?
Demons
Well, you know, I think we as we said in the past, our CAPEX we've kind of averaged about 30 to 40 million annually in maintenance and road. We've we've we're not going to stop on our 10 million dollars that we have currently in strategic capital projects. Most of those projects are designed at cost reduction out of our small log mills. So I think that's appropriate. We'll take a pretty measured approach going forward. But for guidance for you, I think, you know, 2021, 35 to 40 million is a good number. And for 2022, just because of the timing of getting equipment and like potentially 45 to 55 million. But, you know, announcements like this create great great uncertainty. And for businesses, you know, when you get uncertainty, you you stop investing. And I think that's that's we're going to slow down here for the next period of time and assess where this is all going before we make any more commitments to BC.
spk06
Fair enough. Okay. Thanks for that. That's all I had. I'll turn it over. Thanks. Thanks, sir.
Operator
Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Don Demons.
Demons
Great. Thank you, Kate. And thanks, everyone, for your continued support. We certainly appreciate the interest in our company and your time on the call this morning. Steve and I are available and Glenn are available if you have any follow up questions. And we look forward to sharing our fourth quarter results with you in February. With that, have a great day. Thank you.
Operator
Thank you. The conference is now ended. Please disconnect your lines at this time. Thank you for your participation.
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